Author Archives: Nima Montazeri

Power of Aggregators

Aggregators or two-sided marketplaces are a profitable business model. There are a lot of startup pitches that start with ‘we are building Uber for x or Airbnb for y’. There is no doubt that aggregators can become incredibly valuable, profitable, and powerful. However, building an aggregator is not easy. Understanding how aggregators work and what it takes to build a successful aggregator is essential.

Before digging deeper, we start with breaking down what are the competitive advantages of aggregators by examining the aggregation theory. In 2015, Ben Thomson defined aggregation theory as follows:

The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. […]

The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.

This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be aggregated at scale leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.

By this definition, a considerable number of today’s prominent technology companies can be classified as aggregators. They became very successful by automating distribution, and instead of aggregating suppliers, focused directly on providing the best end-user experience. Here are a few examples:

Facebook: Aggregating content from users’ friends and advertisements and making them available to other users;
Airbnb: Aggregating vacant rooms globally and providing an interface for consumers;
MoneySuperMarket.com: Aggregating UK insurance products and selling them to UK consumers;
AutoTrader: Aggregating UK car sales listings for UK consumers; and
Google: Aggregating free content from the web and making it searchable for consumers.

Aggregation theory explains how successful tech giants think. It also serves as a warning to industries who are still based on controlling distribution. There are three key types of aggregators. Each type is determined by the cost/effort of scaling supply and demand and cadence of usage by consumers. Let’s look at a few examples to make it clear.

Micro Aggregators

Micro aggregators must spend a significant amount of time and money to integrate different suppliers into their platform and have excessive costs attracting customers. Often, they must build a relationship with each individual supplier and integrate them into the platform. Moreover, the integration effort is not repeatable for other suppliers, and each supplier requires its own integration effort.

A good example of this kind of aggregator is MoneySuperMarket.com or comparethemarket.com, which are insurance comparison sites. They must build a relationship with every insurance provider and integrate them individually to their platform. Integrating a new insurance provider requires the same amount of integration work.

Scaling demand is also not cheap for these kinds of aggregators. Due to the fierce competition in the space and the lack of differentiation, these firms have a very high cost of customer acquisition. For example, UK price comparison websites spend £48 on average to get a consumer to their website. The other important dynamic of these aggregators is how often people use them. For example, for UK price comparison websites, this is only a few times a year.

Still, these aggregators can be very profitable and very successful. However, there is a limit to how much they can grow. Apart from the above points, another growth limitation factor is legislation. For these aggregators to enter a new market (usually a new country), they need to adhere to new rules and regulations and build new relationships with new suppliers.

Global Aggregators

Global aggregators incur significantly less costs when bringing on new suppliers to their platform; however, they still have high customer acquisition costs. The process of bringing on new suppliers is repeatable. Uber and Airbnb are examples of global aggregators. Once the platform is up and running, the cost of adding a new driver or a new house or even a new city is not much when compared to the cost of building the platform.

The cost of acquiring customers is still noticeable; however, these customers come back to these platforms multiple times a year, and in the case of Uber, multiple times a week. As we can see with Uber and Airbnb, these aggregators can be global dominators.

Super Aggregators

Super aggregators do not incur any costs to obtain suppliers and consumers. Google, Facebook, and Instagram are examples of super aggregators. In the case of Google, their supply is web content and advertisements. Web content is freely available to everyone, and they have an automated and scalable process for onboarding advertisers to their platform. Facebook’s supply comes for free from our photos, videos, status updates, and content that we share from the media. They use the same strategy as Google for scaling advertisers on their platform.

Super aggregators have zero customer acquisition costs, as they are highly differentiated and have monopolies in what they do. With consumers often using these platforms multiple times a day, there is almost no limit on how big supper aggregators can become, and that is why Facebook and Google are two of the most valuable companies in the world.

Market valuation of aggregators is a function of the cost of customer acquisition and supplier integration.

The Internet takes away the cost of distribution. Essentially, everyone can become their own distributor by putting up a website or a mobile app and reaching out to end users. However, in an increasingly fragmented web ecosystem, discoverability becomes a big problem.

This is why aggregators can be very profitable and valuable. They do not create goods, services, or content. However, they provide the best user experience for consumers to discover and use goods, services, or content. To that end, suppliers have no choice but to partner with these aggregators for distribution.

Parallels of Art Making and Software Development

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I used to paint many years ago, and I loved it. In the last few years I have not really touched my brush. Last year when I wanted to get back to running after an eight-month break, Haruki Murakami’s fantastic book, What I Talk About When I Talk About Running helped me to get back to it.

My last painting. November 2005

A few weeks ago I decided to start painting again and started reading Art & Fear: Observations on the Perils (and Rewards) of Artmaking by David Bayles and Ted Orland. This is a book about the way ordinary art gets made, the reasons it often doesn’t get made, and the difficulties that cause so many artists to give up along the way.

What I love about this book is that it uses art to talk about life. You can apply its lessons to almost anything. While reading it, I could not stop thinking about the parallels between art making and the “craft” of software development.

The writers talk about fear of failure, imagination, vision, execution, and joys of building something that only exists in your imagination in the face of uncertainty. They explore artwork’s life cycle, and to me, it was very similar to the life cycle of a software product. “Imagination is in control when you begin making an object. The artwork’s potential is never higher than in the magic moment when the first brushstroke is applied, the first chord struck.”

This is very true whenever we start a new software project. We always strive to build a product with best product/market fit. We want to it to be the most organized, well-written, loosely coupled, highly cohesive code base ever. The imagined code base in our heads is always perfect. The thought-up product is always the best fit for the market. However, problems begin when we humans have to implement it in our imperfect ways. “Finally, at some point or another, the piece could not be other than it is and it is done. That moment of completion is also, inevitably, a moment of loss—the loss of all the other forms the imagined piece might have taken.”

We can never get it to perfect at the outset form, but we move it closer and closer with each round of releasing, testing, and refactoring. After all, “to demand perfection is to deny your ordinary (and universal) humanity, as though you would be better off without it.”

Perhaps the single most important trait of a team building high-quality, fit-for-market software product is the concept of iteration—and its associated learning. In lean cycles we know this as the build, measure, and learn loop.

There is a famous story in the book that resonates nicely with this concept:

The ceramics teacher announced on opening day that he was dividing the class into two groups. All those on the left side of the studio, he said, would be graded solely on the quantity of work they produced, all those on the right solely on its quality.

His procedure was simple: on the final day of class he would bring in his bathroom scales and weigh the work of the “quantity” group: fifty pound of pots rated an “A”, forty pounds a “B”, and so on. Those being graded on “quality”, however, needed to produce only one pot –albeit a perfect one– to get an “A”.

Well, it came grading time, and a curious fact emerged: the works of highest quality were all produced by the group being graded for quantity. It seems that while the “quantity” group was busily churning out piles of work – and learning from their mistakes –the “quality” group had sat theorizing about perfection, and in the end had little more to show for their efforts than grandiose theories and a pile of dead clay.

This story is the best way to explain the build, measure, and learn loop. You have to build many times and release many times to get better at the releasing software. The story echoes nicely with one the most important principles of continuous delivery. If something is difficult or painful, do it more often.

To me the most important phase of the loop is learning for from your work. “Art is like beginning a sentence before you know it’s ending. The risks are obvious: you may never get to the end of the sentence at all—or having gotten there, you may not have said anything.” Building software is very expensive, and it is important to take steps to reduce risks. And this is where learning becomes useful. We should use this learning constantly to course correct and make sure that we build a product that actually says something!

I have yet to start painting again. But I really enjoyed this book. I’m sure at some point I will paint again.

How Did Humans Become Masters of the Earth?

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I have recently finished reading Sapiens, A Brief History of Humankind. The book tries to tell the entire story of us, Homo sapiens (Latin for “wise person”), in 450 pages. It was one of the most thought-provoking books I have ever read. Yuval Harari’s articulate writing takes you back 2 million years and slowly brings you back to present day. Throughout this journey this book changes your mental model of the world we live in.

One hundred thousand years ago we were just one of half a dozen human species all competing for survival. Today we are the only species alive. The book gives a horrific account of our struggles on our path to supremacy. For the first half of our existence, we were an animal of no significance; “The most important thing to know about prehistoric humans, is that they were insignificant animals with no more impact on their environment than gorillas, fireflies or jellyfish”, Harari writes.

However in second half of our story, we undergo a series of revolutions that continues to this day. The “cognitive” revolution about 70,000 years ago is the first. We start behaving in far more ingenious ways than before, and we spread rapidly across the planet. Harari argues that cognitive revolution gave us an edge over other human species.

What has made us so successful is that we are the only animals that are capable of large-scale cooperation. We know how to organise ourselves as nations, companies, and religions, giving us the power to accomplish complex tasks. What’s unique about Harari’s take is that he focuses on the power of stories and myths to bring people together. Baboons, wolves, and other animals also know how to function as a group, of course, but they are defined by close social ties that limit their groups to small numbers. Homo sapiens have the special ability to unite millions of strangers around common myths.

In an interesting thought experiment, imagine one human and one chimpanzee stuck on an island fighting for survival. I would put my money on the chimpanzee. The chimp would easily overpower the human. However, if we have 1,000 humans and 1,000 chimpanzees, there is a very good chance that the humans would win the fight for survival. One thousand chimps can’t cooperate. One thousand humans can. And we are only powerful if we work together in large groups.

The reason that 1,000 humans can cooperate and chimpanzees can’t is simply because humans can come together around myths, legends, and stories. As long we believe in the same story, we follow the same rules and hold same values. If you ask a chimpanzee to give you its banana in return for going to chimpanzee heaven where it can have unlimited bananas in return for its good deed, it would never believe you. However, Homo sapiens easily believe in these imaginary stories and work together on building cathedrals and waging crusades. Ideas like freedom, human rights, gods, laws, and capitalism exist in our imaginations, yet they can bind us together and motivate us to cooperate on complex tasks.

About 11,000 years ago we entered the agricultural revolution era, converting in increasing numbers from hunting and gathering to farming. Harari sees the agricultural revolution as “history’s biggest fraud.” It is very discomforting to think that “we did not domesticate wheat. It domesticated us.” More often than not it provided a worse diet, longer hours of work, greater risk of starvation, crowded living conditions, and greatly increased susceptibility to disease. Harari thinks we may have been better off in the Stone Age.

The scientific revolution begins about 500 years ago. It triggered the Industrial Revolution about 250 years ago, which triggered in turn the Information Revolution about 50 years ago. He argues that this could be the biggest revolution of all. It may be able to alter the course of human evolution and lead to new human species in future.

The final section of the book is especially interesting. After going through thousands of years of history, the author turns to the future and wonders how artificial intelligence, genetic engineering, and other technologies will change our species.

I did not agree with all of Harari’s arguments. However, I would highly recommend this book to anyone interested in early human history. Once you start reading, it is hard to put it down, and certainly it will spark interesting conversations with your favourite Homo sapiens.